SIA’s premium economy captures cost conscious corporate travel market

Premium economy accounted for 7% of business travel bookings in Singapore in 2017 compared to only 1% in 2015, driven by the introduction of a premium economy product by Singapore Airlines (SIA). The increase in premium economy bookings has not come at the expense of business class bookings, which have remained steady as SIA has rolled out its premium economy offering.

SIA currently has 63 aircraft with premium economy seats, representing almost 60% of its total fleet. SIA is slated to add another 11 premium economy aircraft by the end of 2018.

The total number of premium economy seats on the SIA fleet will increase by more than 40% over the next six months, driven primarily by the delivery of seven A350-900ULRs. The A350-900ULRs will feature an unprecedentedly large premium economy cabin with 94 seats and will be used exclusively on nonstop routes to North America.

SIA convinces economy business travellers to upgrade to premium 

Interestingly, SIA reduced economy class capacity on the 777-300ER and A380 fleets to make room for premium economy. This means, business class capacity was maintained and allowed SIA to avoid cannibalising its business class bookings, focusing instead on persuading economy passengers to trade up to premium economy.

SIA was initially hopeful that corporates in Singapore would adopt premium economy policies, enabling employees that would normally fly economy class to fly premium economy on longer flights. Some corporates in Singapore already had premium economy policies and SIA was at a competitive disadvantage with these accounts, since some employees opted for premium economy on other airlines when available.

SIA seems to have been successful at avoiding business class cannibalisation. Business class accounted for the same proportion of business bookings in Singapore in 2015 and 2017 – slightly less than 38%. In fact, the proportion of economy bookings declined from more than 60% in 2015 to slightly above 54% in 2017, according to the CWT and Travelport study.

The 6ppts drop in economy bookings and coinciding 6ppts increase in premium economy bookings suggests corporate passengers have generally traded up from premium economy rather than down from business class – as SIA was hoping for.

Numerous airlines also increase their premium economy offering in hopes of similar opportunities

“Airlines can be cavalier in describing their product as ‘premium economy'”, says Peter Harbison, CAPA Executive Chairman. “Depending on the airline, there’s a range of descriptions and inclusions, but the genuine premium economy, with distinctly separate cabin, seats and service, is becoming very popular with corporates. For the airline, getting the product and pricing right is vital. If the proposition is too good, it cannibalises business class yields, because customers will buy down; if it’s not good enough, they won’t pay the difference to move up. And, as more airlines establish the product, it is becoming an increasingly competitive need to offer it.”

Prior to Aug-2015, premium economy was only available in Singapore from a relatively limited pool of foreign airlines.

More than 10 foreign airlines currently offer a premium economy seat on at least some of their Singapore flights (excludes airlines offering an extra legroom product but a regular economy seat). However, combined, these airlines operate less than 30 daily flights from Singapore with a premium economy offering.

Three years ago, fewer foreign airlines offering a premium economy product in Singapore – and far less flights. LOT Polish Airlines became the latest airline with a premium economy product in the Singapore market in May-2018, when it launched services from Warsaw using three-class 787-8s. Philippine Airlines also introduced a premium economy product in the Singapore market in late 2017, when it began operating some of its Singapore-Manila flights with newly retrofitted A330-300s.

Other foreign airlines offering a premium economy cabin in the Singapore market include Air France, Air New Zealand, All Nippon Airways, British Airways, Cathay Pacific, China Airlines, EVA Air, Japan Airlines, Lufthansa and Qantas. Lufthansa and Qantas (one of the earliest movers with premium economy) have both added premium economy capacity in Singapore this year.

Qantas resumed Singapore-London flights in Mar-2018 after a five-year hiatus, using four-class A380s. At the same time, Qantas reintroduced the A380 on Sydney-Singapore and Melbourne-Singapore, replacing two-class A330s that are not fitted with premium economy. Lufthansa launched Singapore-Munich in Mar-2018 using A350s with premium economy, supplementing its long-standing A380 service on the Singapore-Frankfurt route.